The ongoing chip shortage is sparing no one, but investors should watch for three key markers that separate the winning tech companies from the rest, analysts say. The Covid pandemic disrupted the production of the tiny chips that power our electronics, while simultaneously ratcheting up demand for technology. Companies have been struggling to get their hands on chips ever since, particularly those that make consumer electronics and automobiles. Ford, for example, had to cut production of several key vehicles due to the dearth of chips. Even Apple CEO Tim Cook, known for being a supply chain genius , recently noted the challenges of the semiconductor shortage. "Our largest issue by far has been the chip shortage. That is industry-wide," Cook said on the company's earnings call Jan. 27. As supply challenges continue, investors may consider certain characteristics to find the companies outperforming in the environment. 1. Size Scale is a major factor in how companies are able to weather the scarcity of chips, according to Dan Niles, founder and senior portfolio manager of the Satori Fund. "The biggest advantage or disadvantage between any of these companies is just their sheer size," Niles said. "If you're the biggest kid on the block … if you're the top customer, then you're going to get preference." Apple, which boasts a nearly $3 trillion market cap, has an advantage in securing chips from suppliers over a smaller consumer electronics maker, Niles said. Indeed, Apple's latest quarterly report handily beat Wall Street expectations. The company beat analysts' estimates for sales in every product category, except iPads. "Outside of the demand drivers, which inarguably remain very strong, the revenue beat in F1Q also demonstrated to investors better supply chain management from Apple, and should increase investor confidence in the company navigating supply challenges in the coming quarters," JPMorgan's Samik Chatterjee said in a note following the earnings report. 2. Flexibility Investors should also look at how nimble companies are in adapting their manufacturing, according to D.A. Davidson's Tom Forte. The best-performing companies are those that can modify their lead times to "secure the raw materials they need for their products well in advance" and those that are "able to re-engineer their products," Forte said. Tesla CEO Elon Musk outlined how the electric vehicle maker has tweaked its production to deal with the chip shortage. "We spent a lot of engineering and management resources solving supply chain issues: rewriting code, changing out chips, reducing the number of chips we need. It was chip drama central," Musk said on the company's earnings call Jan. 26. Tesla posted much stronger adjusted profit and revenue in its latest quarterly report than Wall Street had expected, even while warning of persistent chip shortages. 3. Brand From the demand side, companies with outstanding consumer interest will also beat out competitors in the supply chain race, Forte said. "Who's got the brand strength so that consumers are willing to wait for your product?" the analyst said. Audio product maker Sonos , though much smaller in size than Apple or Tesla, has seen strength in customer demand even amid long wait times, Forte highlighted. "We've been dealing with some supply chain issues throughout the year … and we continue to see very low cancellation rates on those orders," Sonos CEO Patrick Spence said in the company's Nov. 17 earnings call. "We haven't seen anything in the market that makes us believe that people are moving to some other product that's out there." For Niles, consumer appetite is the most important factor in evaluating a company's prospects "The number one thing is, what's the demand for your product?" Niles said. How to grade the winners If Forte had to grade companies on their chip supply mastery, he said no firm would get an A. However, on a relative basis, Forte would give Apple an A and Sonos a B when it comes to consumer electronics. Automakers are faring much worse than consumer electronics companies, Forte said, so he would give Tesla an A+ when compared with its auto peers. The chip supply constraints should last at least through most of 2022, according to Forte. "The best-in-class operators have been negatively impacted by the situation. It's a reminder that no one's immune," Forte said. —CNBC's Michael Bloom contributed to this report.
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The ongoing chip shortage is sparing no one, but investors should watch for three key markers that separate the winning tech companies from the rest, analysts say.